Updated: Microsoft meets expectations in latest quarterly report

(This story is running in the print edition of The Seattle Times Oct. 21, 2011. – Janet I. Tu)

Once again, spending by businesses helped boost Microsoft’s bottom line, as the software giant’s first-quarter financial results, reported Thursday, were largely in line with analysts’ expectations.

Thanks in large part to Office and other products in its Business division, Microsoft saw a 6 percent year-over-year rise in profit to $5.74 billion, or 68 cents a share — right on the nose with analysts’ consensus prediction.

In addition, a small rise in revenue in its Windows division resulted largely from sales of PCs to businesses rather than to consumers, a market where sales were flat.

“There were no big surprises,” said Josh Olson, an equity analyst at Edward Jones. And in this environment, with sluggish growth in PC sales, “I thought the Windows business held up all right at a 2 percent increase,” he said.

The Business division, which includes Office, Lync, SharePoint, Exchange and Dynamics, exceeded both analysts’ and internal Microsoft expectations, helping drive overall sales for the quarter to $17.37 billion — up 7 percent from last year’s $16.20 billion.

Analysts had predicted sales of $17.25 billion for the quarter, which ended Sept. 30 and is the first in Microsoft’s fiscal 2012.

It was “another solid quarter,” said Todd Setcavage, Microsoft’s director of investor relations. The $17.37 billion revenue figure set a record for the company’s first-quarter earnings, he said.

Chief Financial Officer Peter Klein, in a conference call with analysts, said: “We started fiscal year 2012 with good momentum. … This quarter, we saw revenue growth in all our segments.”

He also indicated that the demand by large-business customers for Microsoft services and products is still healthy.

“I think they pretty much saw no change in behavior in [those] customers,” said Sid Parakh, an analyst with McAdams Wright Ragen in Seattle. “What they’re trying to say is that business is stable. Which is good” in this economy.

Analysts on the conference call seemed most interested in finding out more about what Microsoft intends to do with Skype, the Internet phone company that the software giant purchased for $8.5 billion. That deal was completed last week.

Klein didn’t get into details, saying it was too soon, but did say opportunities to integrate Skype with “the portfolio of our products” were exciting, and that Skype has already been working on developing more revenue sources, including advertising and premium services.

Microsoft will begin reporting Skype’s results in its earnings reports starting in the second quarter, as a part of its Entertainment and Devices division.

In reply to a question about how much of Microsoft’s $57 billion in cash, cash equivalents and short-term investments is offshore, Klein said about $51 billion.

He sidestepped questions over recent reports that Microsoft might join with others to purchase Yahoo, saying “we’ve got a really good relationship with Yahoo — a long-term alliance.” That’s what’s important, he said.

Here’s how the various divisions did:

Microsoft’s Business division reported $5.62 billion in revenue, up 8 percent from the same period a year ago, which included the launch of Office 2010. In addition to Office, Lync, SharePoint and Exchange did well, growing in the double digits. Its Dynamics business grew 17 percent in the quarter.

The Server & Tools business posted $4.25 billion in revenue, a 10 percent increase from last year and its sixth consecutive quarter of double-digit growth.

The Windows and Windows Live division saw $4.87 billion in revenue, a 2 percent rise over last year. That was in line with the PC market, which grew 1 to 3 percent, Setcavage said.

“We estimate that sales of PCs to businesses grew approximately 5 percent and sales of PCs to consumers were flat,” largely a result of declining netbook sales, Microsoft said in its filing with the Securities and Exchange Commission.

The Entertainment and Devices division posted $1.96 billion in revenue, up 9 percent from a year ago. Windows Phone, which has not sold well thus far, falls into this division. The company did not break out how it did in the first quarter.

The Xbox marked its ninth consecutive month as the top-selling gaming console in the U.S.

The Online division, which includes Bing and which has seen heavy losses in previous quarters, continued to post a loss, $494 million. But the loss was narrower than in previous years, online ad revenue was up, and the division’s revenue actually rose 19 percent from a year ago to $625 million.

Klein acknowledged the need to get revenue per search up. “That’s what we’re laser-focused on — what we’ve got people working with Yahoo on every day,” he said.

In addition, the company revised its fiscal 2012 operating expense guidance. It is now $28.6 billion to $29.2 billion, up from the $28 billion to $28.6 billion guidance offered last quarter, a reflection of the cost of the Skype acquisition.

Microsoft shares closed Thursday at $27.04, down 9 cents. After the markets closed, they fell 14 more cents to $26.90.

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Welcome to Microsoft Pri0: That's Microspeak for top priority, and that's the news and observations you'll find here from Seattle Times technology reporter Matt Day. Send tips or comments to mday@seattletimes.com.